Mergers and Acquisitions 101

In the wake of big merger news like AT&T and T-Mobile and in the social media world, the acquisition of Radian6 and Salesforce.com, I thought I’d do a short series on the bare basics of mergers and acquisitions (M&A) and what they mean to you. Bear in mind much of this is very basic – there are tons of nuances and variations on every aspect of this post, but this should cover the very basic mechanics.

M&A

Why do companies go through M&A?

Companies do M&A for a few basic reasons:

1. Acquire new products. Sometimes buy is cheaper than build, so you as the acquiring company just buy the company outright, rather than mess around with licensing deals. Salesforce and Radian6 would be an example here.

2. Acquire new assets. Some companies will be acquired for non-salesable assets (as opposed to products to be sold). When Southwest bought Airtran, it was speculated that this was because Southwest wanted an Atlanta hub. Sometimes companies are acquired simply for their customer base or market share, as with AT&T and T-Mobile.

3. Acquire new talent. Google is notorious for doing this, such as with Jaiku. They wanted the engineers and grabbed the entire company to get them.

4. Reduce operating costs or increase scale. Sometimes two companies can achieve greater efficiency or greater scale by merging. In the corporate world, this is a synergy merge. For example, Proctor & Gamble acquired Gillette not only for the product line, but also for a greater scale of manufacturing capacity and cost savings.

There is an underlying reason for all of these, however: companies go through mergers and acquisitions for an endgame goal of improved financial performance for shareholders. Remember this fact.

What happens during M&A?

Typically, prior to a merger happening, both companies do their due diligence in examining each others’ operations and financial performance. The value of the target company is negotiated on, and if everything seems like it would work well enough, contracts are signed and the merging process gets underway.

The acquiring company buys out enough ownership in the target company to effectively gain control over it. In publicly traded companies, this is done largely by buying shares of voting stock until the acquiring company owns a majority stake. In privately held companies, this is done by buying out owners of equity in the company from just a single sole proprietor to a team of shareholders.

Once ownership is acquired, shareholders are paid for their stake in the company and then the process of actually merging two companies together begins.

What happens to employees?

If you’re a shareholder of the target company, you get paid a cash sum or get converted shares. For example, if you were an employee of GTE that held stock in GTE back in the day, your GTE stock got converted to Verizon stock when the acquisition completed.

If you’re an employee of either company, you are effectively on notice. Here’s the thing about mergers and acquisitions: in order to achieve greater financial performance (which is the sole reason for M&A as stated above), you have to immediately reduce redundancies and inefficiencies. For every overlapping role in either company, one position will continue on and one or more people will be laid off. Let’s look at the human side of the four examples above.

1. Acquire new products. Everyone not tightly associated with the new products is probably getting laid off in the target company eventually. In the example, Radian6′s product team and probably a few of its service team will be kept in order to sustain development and service agreements, but other folks may not be.

2. Acquire new assets. If the asset requires staffing, such as the Southwest/Airtran example (new routes in and around Atlanta mean staff to operate them), they’ll be kept. If the asset requires no staffing, such as a database, then the target company’s entire team will probably be let go.

3. Acquire new talent. If you are the target pool of talent being acquired, life is good. If you’re not, you’re being let go. In the example, Google wanted Jaiku’s team and bought them out, but likely shed everyone who was not the engineering team.

4. Reduce operating costs or increase scale. This is the messiest of mergers as people in both companies are under the gun to demonstrate why they should be kept. It’s effectively a corporate deathmatch: two employees enter, one employee leaves, and employees in the acquiring company as well as the target company are at risk.

Remember this above all else: mergers and acquisitions happen for improved financial performance. Anything that doesn’t directly contribute to that in either company with regards to mergers and acquisitions is up for grabs. Also, bear in mind that there tend to be as many exceptions as rules when it comes to mergers. For every example and case I’ve cited here, you can easily name 10 cases where the consequences were different, even down to the endgame goal. Time Warner’s acquisition of AOL got them anything but improved financial performance, for example. Don’t take this very basic, very brief look at M&A as a canonical guide to what will happen if your company is going through a merger.

In tomorrow’s post, I’ll share with you some things you can do to either make yourself ready to be employed elsewhere or defend your position in a merger/acquisition.


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  • http://www.dayngrzone.com/ Dayngr

    Christopher,

    Excellent idea for a series and quite timely! I’m sure there are many people who’ve wondered how it all works. Thank you so much for sharing the good news! Together with @Salesforce, we are quite excited to see what the future holds.

    All the best,
    Trish (@Dayngr)
    Community Manager | Radian6

  • Anonymous

    Here’s one for you… What if I am a sole proprietor, a contractor, a non profit, and a company all rolled into one, and I start splitting myself apart, ON THE SAME PROJECT!!!

    How do I roll myself back into one person….